1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 FRIDAY, MAY 21, 2010 § 7 8 COMMISSION MEETING 9 FRIDAY, MAY 21, 2010 10 BE IT REMEMBERED THAT on Friday, the 21st 11 day of May 2010, the Texas Lottery Commission meeting 12 was held from 9:05 a.m. to 11:17 a.m., at the Offices of 13 the Texas Lottery Commission, 611 East 6th Street, 14 Austin, Texas 78701, before CHAIRMAN MARY ANN 15 WILLIAMSON and COMMISSIONERS DAVID J. SCHENCK and J. 16 WINSTON KRAUSE. The following proceedings were reported 17 via machine shorthand by Aloma J. Kennedy, a Certified 18 Shorthand Reporter of the State of Texas, and the 19 following proceedings were had: 20 21 22 23 24 25 2 1 APPEARANCES 2 3 CHAIRMAN: Ms. Mary Ann Williamson 4 COMMISSIONERS: 5 Mr. David J. Schenck Mr. J. Winston Krause 6 GENERAL COUNSEL: 7 Ms. Kimberly Kiplin 8 EXECUTIVE DIRECTOR: Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: 10 Mr. Philip D. Sanderson 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - FRIDAY, MAY 21, 2010.................. 7 4 AGENDA ITEM NO. I - Meeting Called to Order......... 7 5 AGENDA ITEM NO. II - Report, possible discussion and/or action on the Bingo Advisory Committee’s 6 activities, including the April 28, 2010 Bingo Advisory Committee meeting.......................... 7 7 AGENDA ITEM NO. III - Report, possible discussion 8 and/or action on the Bingo Advisory Committee Annual Report....................................... 11 9 AGENDA ITEM NO. IV - Report, possible discussion 10 and/or action on the 2009 Charitable Bingo Annual Report.............................................. 14 11 AGENDA ITEM NO. V - Consideration of and possible 12 discussion and/or action on a petition for rulemaking regarding 16 TAC §402.200 regarding 13 general restrictions on the conduct of bingo........ 16 14 AGENDA ITEM NO. VI - Report by the Charitable Bingo Operations Director and possible discussion 15 and/or action on the Charitable Bingo Operations Division’s activities, including updates on HB 16 1474 implementation, Bingo Advisory Committee nominations, status of licensees, rulemaking and 17 form revisions, audits, pull-tab review, special projects, allocations, and upcoming operator 18 training............................................ 33 19 AGENDA ITEM NO. VII - Report, possible discussion and/or action on lottery sales and revenue, game 20 performance, new game opportunities, advertising, market research, trends, and game contracts, 21 agreements, and procedures.......................... 34 22 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on transfers to the State and the 23 agency’s budget status.............................. 38 24 AGENDA ITEM NO. IX - Report, possible discussion and/or action on the 5% biennial budget reduction 25 for the 2010-2011 biennium.......................... 39 4 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Consideration of and possible discussion and/or action, including proposal, on 4 amendments to 16 TAC §401.315 relating to Mega Millions On-Line Game Rule.......................... 41 5 AGENDA ITEM NO. XI - Consideration of and 6 possible discussion and/or action, including proposal, on new rule 16 TAC §401.318 relating to 7 Withholding of Delinquent Child Support Payments from Lump-sum and Periodic Payments of Lottery 8 Winning in Excess of Six Hundred Dollars............ 50 9 AGENDA ITEM NO. XII - Consideration of and possible discussion and/or action, including 10 proposal, on new rule 16 TAC §401.319 relating to Withholding of Child Support Payments from 11 Periodic Installment Payments of Lottery Winnings... 50 12 AGENDA ITEM NO. XIII - Consideration of and possible discussion and/or action, including 13 proposal, on new rule 16 TAC §401.371 relating to collection of delinquent obligations for 14 lottery related accounts............................ 58 15 AGENDA ITEM NO. XIV - Report, possible discussion and/or action on the lottery operations and 16 services procurement................................ 61 17 AGENDA ITEM NO. XV - Report, possible discussion and/or action on the 81st and/or 82nd 18 Legislature......................................... 63 19 AGENDA ITEM NO. XVI - Consideration of and/or report, possible discussion and/or action on 20 external and internal audits and/or reviews relating to the Texas Lottery Commission, and/or 21 on the Internal Audit Department’s activities, including an internal audit on jackpot 22 estimation.......................................... 64 23 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on GTECH Corporation.................. 67 24 25 5 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVIII - Report by the Executive Director and/or possible discussion and/or action 4 on the agency’s operational status, agency procedures, and FTE status.......................... 68 5 AGENDA ITEM NO. XIX - Consideration of the 6 status and possible entry of orders in: A. Docket No. 362-10-2714 – 7 El Michoacano B. Docket No. 362-10-1403 – Palo 8 Alto Supermarket C. Docket No. 362-10-2961 – Chi’s 9 D. Docket No. 362-10-3231 – The Dam Store 10 E. Docket No. 362-10-2564.B – Laura Holder 11 F. Case No. 2010-323 – Valero Corner Store #2276 12 G. Case No. 2010-433 – Murphy USA #7333...... 68 13 AGENDA ITEM NO. XX - Public comment................. 76 14 AGENDA ITEM NO. XXI - Commission may meet in Executive Session: 15 A. To deliberate the duties and evaluation of the Executive Director pursuant to 16 Section 551.074 of the Texas Government Code. 17 B. To deliberate the duties and evaluation of the Internal Audit Director pursuant 18 to Section 551.074 of the Texas Government Code. 19 C. To deliberate the duties and evaluation of the Charitable Bingo Operations 20 Director pursuant to Section 551.074 of the Texas Government Code. 21 D. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 22 the Texas Government Code. E. To deliberate the duties of the Human 23 Resources Director pursuant to Section 551.074 of the Texas Government Code. 24 25 6 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXI - (CONTINUED) 4 F. To receive legal advice regarding pending or contemplated litigation 5 pursuant to Section 551.071(1)(A) and/or to receive legal advice 6 regarding settlement offers pursuant to Section 551.071(1)(B) of the Texas 7 Government Code and/or to receive legal advice pursuant to Section 8 551.071(2) of the Texas Government Code, including but not limited to: 9 First State Bank of DeQueen et al. v. Texas Lottery Commission 10 Texas Lottery Commission v. Leslie Warren, Texas Attorney General Child 11 Support Division, Singer Asset Finance Company L.L.C., and Great- 12 West Life & Annuity Insurance Company 13 Employment law, personnel law, procurement and contract law, 14 evidentiary and procedural law, and general government law 15 Lottery Operations and Services procurement and/or contract............ 83 16 AGENDA ITEM NO. XXII - Return to open session 17 for further deliberation and possible action on any matter discussed in Executive Session........ 83 18 AGENDA ITEM NO. XXIII - Adjournment................. 84 19 REPORTER'S CERTIFICATE.............................. 85 20 21 22 23 24 25 7 1 P R O C E E D I N G S 2 FRIDAY, MAY 21, 2010 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning. I 6 would like to call the meeting of the Texas Lottery 7 Commission to order. Today is May 21, 2010. The time 8 is 9:05. Commissioner Schenck and Krause are present. 9 We have a quorum. 10 AGENDA ITEM NO. II 11 CHAIRMAN WILLIAMSON: The first item on 12 the agenda is report, possible discussion and/or action 13 on the Bingo Advisory Committee's activities, including 14 the April 28, 2010 Bingo Advisory Committee meeting. 15 Kimberly Rogers, the Chair, is not available today. 16 So, Phil, I believe you're going to do 17 that presentation for her? 18 MR. SANDERSON: Yes, ma'am. I'll provide 19 a brief update of the meeting they held on April the 20 28th. All members were present except for two, Markey 21 Weaver and Melissa Young. The meeting, we presented -- 22 the public service announcement for 2009 was made 23 available for them to review and look at. There was 24 some discussion about possibly putting it on Utube to 25 help -- you know, maybe just put it out on the Internet 8 1 so people could see more the bingo activities in Texas. 2 They discussed and approved their 2009 3 report to the Commission, which is the next agenda item. 4 There was one committee workgroup on product development 5 as well as some other committee members -- committees 6 that were formed to discuss rules. The output of that 7 was a workgroup to review the impact and effect of legal 8 and illegal amusement games of the bingo industry. 9 Francis Ciancarelli, a BAC member, is 10 chairing up the committee group in gathering that 11 information and a report that will be discussed at their 12 next meeting scheduled for July the 28th, I believe, and 13 then they'll present it to you hopefully at the August 14 meeting, give you that presentation. 15 That's the only activities that transpired 16 on the meeting day. I would be glad to answer any 17 questions. 18 CHAIRMAN WILLIAMSON: Thank you, Phil. 19 Commissioners, do you have any questions? 20 COMMISSIONER SCHENCK: A quick -- yes, one 21 question, Phil. Who else is working with Francis 22 Ciancarelli on the effective illegal gambling and 23 8-liners? 24 MR. SANDERSON: Well, Kimberly Rogers and 25 Francis and Earl Silver, I believe, are the basic 9 1 subcommittee. But all committee members were encouraged 2 to provide information and conduct research and get it 3 to those three members, primarily so they don't 4 circumvent the open meetings notice -- or Open Meetings 5 Act. So they've created one little mini-workgroup to 6 compile the information of the entire BAC. 7 COMMISSIONER SCHENCK: And when will we 8 have their report again? 9 MR. SANDERSON: They're going to discuss 10 that at their July meeting -- 11 COMMISSIONER SCHENCK: Okay. 12 MR. SANDERSON: -- make a presentation and 13 discuss it and finalize it, and they should have that 14 for your August meeting. 15 COMMISSIONER SCHENCK: I had intended to 16 and had tickets to attend that meeting, and I'm sorry I 17 wasn't able to be there. My son was born that morning. 18 MR. SANDERSON: Well, congratulations. 19 COMMISSIONER KRAUSE: Phil, you had 20 described to me some, I guess, hesitancy on behalf of 21 the BAC to take on our request for information about 22 illegal gaming, you know, I guess in the vicinity of 23 bingo halls. What do you attribute that to, if 24 anything? 25 MR. SANDERSON: I don't know if it was the 10 1 sense of hesitation for the assignment itself. I think 2 the initial reaction that I got from talking to some of 3 the members individually was, "Is there a budget for us 4 to use to go around and conduct this research?" And I 5 informed them that there is no budget, that it's, you 6 know, strictly voluntary and, you know, the Commission 7 is asking you as a member of this committee to go out 8 and gather this information. 9 COMMISSIONER KRAUSE: Oh, so they're happy 10 to do it, they just want us to pay them for it? 11 MR. SANDERSON: That's probably a good 12 summarization. 13 COMMISSIONER SCHENCK: It's the way the 14 world works, I think. 15 COMMISSIONER KRAUSE: Well, I know. But, 16 you know, I think the goal here is to give information 17 to the Legislature that may put us in a better position 18 to make their operations more effective and profitable 19 for them as well as for charities in Texas. And so, you 20 know, I guess I'm a little disappointed about the 21 shortsightedness of that. 22 MR. SANDERSON: I know I've seen several 23 emails from Mr. Ciancarelli, and I know he's actively 24 pursuing gathering that information, and I'm assuming 25 the other members of the committee are as well. 11 1 COMMISSIONER SCHENCK: Well, I would hope 2 that the message that we've delivered to the BAC in 3 their last few meetings has been clear enough that we 4 expect this train to leave the station and they can be 5 on board or they cannot be on board. But there needs to 6 be some movement taken in this next legislative session 7 one way or another with respect to this volume of 8 unlawful gaming activities. 9 COMMISSIONER KRAUSE: There is no doubt. 10 It's just that sometimes I wonder if the BAC is hearing 11 what we're asking for. 12 CHAIRMAN WILLIAMSON: All right. Thank 13 you, Phil. 14 AGENDA ITEM NO. III 15 CHAIRMAN WILLIAMSON: Let's go on to Item 16 No. III, the report, discussion and/or action on the BAC 17 annual report. And this is not an action item. 18 MR. SANDERSON: That's correct. The Bingo 19 Enabling Act requires that the BAC report annually to 20 the Commission on the BAC's perspective of the state of 21 the charitable gaming industry -- charitable bingo 22 industry in Texas. And specific comments on gross 23 receipts, net receipts, charitable distributions, 24 expenses, attendance and then any other matters that 25 have been requested by the Commission. 12 1 They formed a workgroup of three members 2 that compiled the information. They presented the 3 report to the membership at the last meeting on April 4 the 28th. Page 2 and 3 provides their synopsis of where 5 the gross receipts and the net receipts, distributions 6 and expenses and attendance categories are as it relates 7 to 2009 compared to previous years. 8 The concluding comment from the members, 9 with the decline in net proceeds for the last three 10 quarters of 2009, it seems that charitable bingo is not 11 recession-proof. If this decline continues, many 12 conductors will be at risk of falling short of the 13 mandate of HB 1474. The bingo activity must result in 14 positive net proceeds over the previous four quarters. 15 Expenses should be managed to be in line with any 16 revenue decline. 17 That was their concluding remark from 18 their study. And with that, I'll be glad to answer any 19 questions. 20 CHAIRMAN WILLIAMSON: Commissioners, do 21 you have any questions? 22 COMMISSIONER KRAUSE: No, ma'am. 23 COMMISSIONER SCHENCK: One quick question 24 for you, Phil. The declines you say were over the what, 25 the last -- the fourth quarter only or the last two 13 1 quarters? 2 MR. SANDERSON: The last three quarters 3 showed a lot of -- the quarter-to-quarter, I believe, 4 increase, the decline as it relater to the previous 5 quarter of 2008 is where that was coming in. The first 6 quarter had such a positive gain that it carried the 7 rest of the year. And I believe just initially -- I 8 looked at the first quarter of 2010, and I want to say 9 it's just about equal to the first quarter of 2009 and 10 maybe down just a little bit as it relater to the total 11 gross receipts. 12 COMMISSIONER SCHENCK: Well, I just wonder 13 if it's worth looking, Phil. The surmise here is that 14 it's generally the recession that's turned down in the 15 last three quarters the amount of bingo activity that's 16 going on. But I think we haven't seen the same with 17 respect to lottery sales, unless I'm mistaken, so I'm 18 wondering if the assumption is correct and if maybe 19 there isn't another cause that's worth considering 20 before we -- 21 MR. SANDERSON: That's a possibility, I 22 believe, and I'll defer to Executive Director Grief on 23 that. But I believe the lottery sales have continued an 24 increase over the last six to nine months. 25 MR. GRIEF: That's correct, yes. 14 1 COMMISSIONER SCHENCK: So somehow the 2 recession -- if it's the recession that's causing these 3 things, it's causing people to buy lottery tickets, not 4 to participate in bingo, that doesn't make a whole lot 5 of sense to me. So I think there is probably some other 6 cause at work there. Maybe it's worth looking into that 7 a little deeper. 8 MR. SANDERSON: Yes, sir. 9 CHAIRMAN WILLIAMSON: Any other comments? 10 All right. Thank you, Phil. 11 AGENDA ITEM NO. IV 12 CHAIRMAN WILLIAMSON: Item No. IV is 13 report, possible discussion and/or action on the 2009 14 Charitable Bingo Annual Report. 15 Phil, this is your item. 16 MR. SANDERSON: Thank you, Chairman. And 17 this is an action item. This is the 2009 annual report 18 of the charitable bingo operations in Texas. This is 19 a -- the initial annual report resulted as a -- from a 20 business plan that the Commission developed over 2008 21 and 2010. Additionally, House Bill 1474 has now 22 included some language that the Commission report on 23 June 1st of each even-numbered year certain information 24 as it relates to gross receipts, net receipts, adjusted 25 gross receipts and distributions. And this report 15 1 contains that information. Once it is approved at this 2 meeting, it will be published and will be presented to 3 the legislative membership as required by House Bill 4 1474. 5 And I'll be glad to answer any questions 6 that you may have or comments. 7 CHAIRMAN WILLIAMSON: Commissioners? 8 COMMISSIONER SCHENCK: It looks good to 9 me, Phil. Obviously, the final version is going to have 10 color? 11 MR. SANDERSON: It will. 12 COMMISSIONER SCHENCK: The shades of gray 13 and the bar charts will mean something? 14 MR. SANDERSON: It will be. The 15 Chairman's is in color, I believe. 16 CHAIRMAN WILLIAMSON: Yes, mine is in 17 color. 18 COMMISSIONER SCHENCK: That looks great. 19 (Laughter) 20 MR. SANDERSON: Mine was black and white 21 as well, too. 22 COMMISSIONER SCHENCK: Thank you. 23 CHAIRMAN WILLIAMSON: All right. Is there 24 a motion to approve this report? 25 COMMISSIONER SCHENCK: I move that we 16 1 approve this report. 2 CHAIRMAN WILLIAMSON: Is there a second? 3 COMMISSIONER KRAUSE: Second. 4 CHAIRMAN WILLIAMSON: All in favor? 5 COMMISSIONER SCHENCK: Aye. 6 CHAIRMAN WILLIAMSON: Aye. 7 COMMISSIONER KRAUSE: Aye. 8 CHAIRMAN WILLIAMSON: Motion passes 3-0. 9 MR. SANDERSON: And, Chairman, I have the 10 message from the Chairman and Director for you to sign 11 during the next break. 12 CHAIRMAN WILLIAMSON: That will be fine. 13 MR. SANDERSON: Thank you. 14 AGENDA ITEM NO. V 15 CHAIRMAN WILLIAMSON: All right. Let's go 16 on to Item No. V, is consideration of and possible 17 discussion on a petition for rulemaking regarding 16 TAC 18 402.200 regarding general restrictions on the conduct of 19 bingo. 20 Sandy, this is your item. 21 MS. JOSEPH: Good morning, Commissioners. 22 For the record, my name is Sandra Joseph, Special 23 Counsel with the Legal Services Division. 24 On April 27, 2010, the Commission received 25 a petition from Kris Keller, a commercial lessor, with 17 1 several properties or operations in the San Antonio 2 area, requesting amendment of Rule 402.200 concerning 3 general restrictions on the conduct of bingo. His 4 request is to add a provision setting a minimum price of 5 $10 for card-minding devices sold in the San Antonio 6 metropolitan area. 7 The Bingo Enabling Act does provide in 8 section 2001.056 that the Commission may set the price 9 or adopt a schedule of prices for the sale of bingo 10 cards by a licensed authorized organization. This 11 petition is identical to one that Mr. Keller filed last 12 summer, and it's similar to one that he filed in 2007. 13 The Commission denied both of those petitions, 14 indicating that it did not wish to set prices for bingo 15 cards. 16 The Administrative Procedure Act provides 17 that within 60 days of receiving a petition, the 18 Commission will either deny the petition in writing or 19 initiate a rulemaking proceeding. That 60-day period 20 will expire on June 26th. In accordance with the 21 Commission's previous actions on similar rulemaking 22 petitions, the staff recommends denial of Mr. Keller's 23 petition. 24 CHAIRMAN WILLIAMSON: Thank you. 25 This has come before us before. 18 1 COMMISSIONER SCHENCK: This has come -- I 2 can recall this coming up twice before. 3 CHAIRMAN WILLIAMSON: Right. 4 COMMISSIONER SCHENCK: And to me it seems 5 it's not worthy of reissuing this as a potential 6 rulemaking, given that we've considered this multiple 7 times. The one thought I have is, we obviously do have 8 this legislative power. We haven't as yet, to my 9 knowledge, ever exercised it. 10 And it might be worth getting some input 11 perhaps from the BAC, Phil, on what the broader industry 12 feels would be the appropriate circumstances for us ever 13 exercising the authority to set a minimum price for 14 activities. And to my mind, there obviously should be 15 some anti-competitive behavior as a trigger for us to be 16 doing things like setting prices. But absent proof of 17 predatory pricing and the like, I can't imagine why we 18 would want to interfere with the free markets, and allow 19 people to compete freely with setting prices as low as 20 they think is necessary. 21 But since we have that power, I would like 22 some input as to when the industry as a whole thinks we 23 ought to use it. But I wouldn't want to go through 24 another set of rulemakings, which we've twice considered 25 and rejected. 19 1 CHAIRMAN WILLIAMSON: Well, Mr. Keller is 2 here today. So at this time, if you would like to come 3 up and present your case, as it were. 4 MR. KELLER: Sure. My name is Kris 5 Keller. And when this came up before, I was unaware 6 that it was coming up to y'all, so I was not here. But 7 today I came up -- let me just start off by saying that 8 this isn't the first time that pricing has been 9 addressed to the Lottery Commission. It's happened in 10 Corpus Christi years ago where they tried to get the 11 lottery to step in and stop this price war that was 12 going on. 13 Whenever electronic bingos first came on 14 the scene, their intent was never for 95 or 97 percent 15 of your crowd to be playing in electronic; it was for 16 five percent of your crowd to play in electronic, at a 17 premium price. Well, you know, that premium price has 18 gone below the paper price almost. In my area where you 19 can -- electronics sell for four, five and six dollars 20 per session. 21 And it's just unfair really to any new 22 game starting up. They can't compete against that, for 23 one thing. But, like I say, the intent of electronics 24 wasn't for everybody in the hall to be playing them. It 25 was for premium. And electronics also, they came on the 20 1 scene before the lottery ever started governing bingo. 2 There was electronic bingo cards, computer that held 3 bingo cards, but there wasn't a limit on the cards the 4 machine could play. And the players boycotted it, 5 because if you didn't have that computer playing your 6 cards for you, you weren't going to win, because they 7 were playing 500 cards, you were playing six. 8 So we might look at it another way. Maybe 9 a better approach from my side would have been, instead 10 of trying to set a minimum price -- and this is just for 11 my area only as I think kind of a test field to see if 12 it did not increase the amount of monies charities were 13 making. Maybe a better approach would have been to set 14 the number of electronics that a hall can have. 15 Instead of a hall having 1,000 computers, 16 maybe we should look at putting the limit of, say, you 17 know, 200 or 300 computers that is the maximum that you 18 can have and then sell them for whatever you can. Like 19 I say, for a hall to have -- a large hall to have 800 or 20 1,000 computers, there is just no way that a small hall 21 can compete against that. 22 And I know that in the San Antonio area, 23 the people I've spoke to, even the ones that are 24 involved in the price war -- I'm not involved in it -- 25 but the ones that are have made comments to me that they 21 1 wish they weren't. They would like not to be in a price 2 war. And I know I got some resistance from other parts 3 of the state when I first brought this up, but that 4 resistance may have mellowed out also, because of -- 5 like I say, I'm willing to just try it in the San 6 Antonio area. And I really think it would benefit 7 bingo, it would benefit the charities, everyone 8 involved. 9 And one other thing that the lottery might 10 look at, is instead of having the cap of 66 cards on one 11 machine, go ahead and let it -- so now a person comes in 12 and they'll buy seven or eight machines. Well, go ahead 13 and take that cap off the 66. That would save the halls 14 money also. Now instead of having to rent so many 15 electronics from their supplier, they could rent less 16 machines and put more cards on there. 17 One other thing. This has been addressed 18 by the lottery before when they tried to tie the number 19 of electronics that you could play in your hall to the 20 number of people in your hall. And that turned out -- 21 it was very hard to govern. It was almost impossible 22 for the lottery to walk in and say, "Okay. Let's see. 23 40 percent of your crowd can be playing in electronic," 24 whenever a hall doesn't know what 40 percent of their 25 crowd is going to be until the game actually starts. 22 1 So it has been tried before. And I would 2 just really like to see something be done. Whether it's 3 this or, like I say, setting the number of electronics 4 the hall can have, might be a better approach and it 5 might be something that would be very easy to police in 6 there. 7 And I can answer any questions if y'all 8 have any. 9 CHAIRMAN WILLIAMSON: Commissioners? 10 COMMISSIONER KRAUSE: Well, I've got a 11 question; and that is, is that it sounds like we've got 12 an artificial ceiling on the number of games that a 13 single card-minder can play. 14 MR. KELLER: Yes, sir. 15 COMMISSIONER KRAUSE: Okay. And so you 16 mentioned that if we got rid of that, then that might 17 help solve the problem. 18 MR. KELLER: It would sure save the 19 charities money on the number of electronic machines 20 they had to rent, yes, sir. 21 COMMISSIONER KRAUSE: Yes. 22 MR. KELLER: I say in my area. I don't 23 know about the other parts of the state a whole lot. 24 But I know in my area, very rarely do you see one person 25 walk in and buy one electronic. They're buying five and 23 1 seven at a time -- not in my halls, because we charge 2 more money for them than the other ones in the price 3 war. So that would help, yes, sir. 4 COMMISSIONER SCHENCK: Well, just so I 5 understand. When you say in your area that you are 6 looking for this, as I remember the rulemaking we're 7 proposing, is it Bexar County, is it the San Antonio 8 area? Where would the line be drawn here? I'm looking 9 for the -- 10 MR. KELLER: It would be Bexar County and 11 the counties that touched Bexar County. 12 COMMISSIONER SCHENCK: Well, there is an 13 obvious problem with this in that if we were talking 14 about fruit or anything else, if Kroger came in here and 15 said, "Albertson is selling lettuce for 50 cents a head. 16 That's too cheap. People aren't going to come into my 17 place to buy lettuce," the one person that would be 18 annoyed by that is the consumer. And the interest 19 everything has is getting those bingo players into the 20 halls to play. And I can't imagine that all of the 21 bingo players are as flexible or amenable to changes or 22 to our policy considerations. 23 So you tell, let's say, a woman that has 24 had some experience in life that she can't get a card- 25 minding device because they're sold out now or that the 24 1 Lottery Commission has said that she now has to pay 2 twice what she used to pay for a card-minding device, 3 she may stop playing bingo. And I think the charities 4 don't want that. 5 MR. KELLER: I understand your concern on 6 that. But from the players that have talked to me about 7 it, it's actually reversed because, like I say -- 8 COMMISSIONER SCHENCK: They want to pay 9 more? 10 MR. KELLER: No. They know that whenever 11 they go into a hall that's selling them for four and 12 five dollars, they can't buy just one and compete. Like 13 I say, very rarely does a customer come in and only buy 14 one electronic. They know they have to buy four or five 15 or six or seven of them in order to be on equal ground 16 with the other patrons in the hall. 17 COMMISSIONER SCHENCK: So then they come 18 to your hall instead where they pay more and everyone 19 has fewer devices? 20 MR. KELLER: Yes, sir. We have -- 21 COMMISSIONER SCHENCK: Well, then, it 22 doesn't sound like the exchange is really affecting -- 23 there are rational players out there that make the 24 decision to come to your place and not buy so many 25 devices, at a lower price? 25 1 MR. KELLER: It would be a lot better for 2 us if there was a more standard pricing of -- 3 slowly over the -- this has been going for two years, I 4 think, or a little longer. And you can tell from the 5 records if the numbers are correct that are turned in to 6 the Lottery Commission that are printed on the Internet. 7 The games, with the exception of one operator in Bexar 8 County -- and there's nine halls involved in this price 9 war, with the exception of one bingo operator. 10 The other people involved, their charities 11 make minimal amount of money, and there's a formula that 12 we can use to determine exactly how a charity is faring 13 over the course of a quarter. And for several of these 14 games involved, they actually show a negative number at 15 the end of the sheet per session on there. 16 And what really brought this up in the 17 first place for me was illegal money being brought into 18 bingo to supplement the bingo. Now, illegal money being 19 from 8-liners, from the illegal 8-liners. I'm not 20 talking about the ones that people say might be legal. 21 I don't want to go there. But illegal 8-liner rooms 22 supplementing the bingo in order to keep the 8-liner 23 rooms going is what's happened in my area. A recent 24 thing happened in the last few months down there where 25 two of those halls actually got busted for having the 26 1 machines, and they had to take them out. 2 COMMISSIONER SCHENCK: Well, that's a 3 serious problem all over the state, and we're looking at 4 it very aggressively. 5 MR. KELLER: That is. And, like I say, 6 maybe a better approach to this would be for me to ask 7 for a rule change on the number of electronics you can 8 have. You can clearly see that a small hall has zero 9 chance of competing against a large hall that has 800 or 10 1,000 units. 11 COMMISSIONER KRAUSE: Well, let me ask a 12 question about the size of the hall. Okay. From the 13 bingo players' perspective, does the bingo player feel 14 like that he or she has got a better chance of winning 15 when there are fewer games overall being played in that 16 session versus many, many games being played in that 17 session? 18 MR. KELLER: Well, I'm not sure that I 19 understand the question. Would more games -- 20 COMMISSIONER KRAUSE: Well, I guess what 21 I'm getting at is that, you know, if -- you know, a 22 small hall -- okay? -- there are dramatically fewer 23 games being played than in the large hall, because the 24 large hall has got more people, you know, and more games 25 being played and that kind of thing, then -- you know, I 27 1 mean, if everybody had a card-minder and we limit the 2 number of games on a single card-minder to 66 games and 3 you've got a small hall that's got 20 people playing and 4 you've got a large hall that's got 1,000 people 5 playing -- okay? -- does the individual bingo player 6 feel like they've got a better shot at winning by going 7 to the small hall where there are fewer people competing 8 against them or do they -- may make more money going to 9 the large hall where it doesn't matter how many people 10 they're competing against but maybe the pot is bigger? 11 MR. KELLER: Well, both. Some people do 12 realize that, "Less people playing, I have a better 13 chance to win." But the majority of people in bingo 14 feel like, "I'm going to go to where I can win more 15 money," because a small hall won't give away the $5,000 16 that a large hall will give away, a commercial hall. 17 And that's another point that we can look 18 at, too, is the Lottery Commission has a cap on your 19 prize money for a reason. You can imagine if there was 20 no cap, well, people are going to go where they can win 21 the most money for sure. If you look at your event 22 pull-tabs, there's a set price on those. I'm pretty 23 sure that you have to sell it for face value. You might 24 be able to sell it for less, but there's a built-in 25 profit in the box. So if you sold it for less, you're 28 1 going to make less. 2 I just think it would level the playing 3 field and be really beneficial to the charities that 4 participate in bingo. And, like I say, it's just for 5 that San Antonio area. And I'm willing to say just test 6 it, try it. Six months down the line, if the charities 7 aren't showing a better line at the bottom for 8 theirself, knock it out again. But I'm positive that 9 the charities would definitely see an increase in their 10 profits for sure. 11 CHAIRMAN WILLIAMSON: All right. Phil, 12 can you enlighten us a little more on this? 13 MR. SANDERSON: Yes. Chairman and 14 Commissioners, I just want to make a couple of 15 clarifying remarks from Mr. Keller on some of the 16 comments he made. First, the electronics were 17 authorized in Texas in 1995 by the Legislature, and the 18 Legislature put a cap of no more than 30 percent of the 19 gross receipts for that bingo occasion could be used for 20 electronics. In '97, they amended the statute to change 21 the 30 percent gross receipt limitation to 40 percent of 22 those in attendance. And then in 2003, they removed 23 that requirement altogether. 24 So the Lottery Commission, through rules, 25 has set a cap of 66 card faces per unit. There is no 29 1 limit to how many units an individual may play. And so 2 that's where -- you know, the majority of the 3 information is provided as statutory legislative, you 4 know, requirements. It's not something the Lottery did. 5 Additionally, the statute -- or the 6 Legislative is the one that put the cap on prizes of, 7 $2,500 per session. That's in the Bingo Enabling Act. 8 It's not the Lottery that put the cap on prizes. So I 9 just wanted to make those clarifications. 10 Now, to some other points, with House Bill 11 1474, organization are now required to have net 12 proceeds, so they're going to have to look at their 13 expenses and they're going to have to look at their 14 income. And so there may be some correction to this 15 situation as a result of that requirement to where they 16 have to start looking at their expenses and how much 17 they're charging for the other items and their paper 18 pull-tabs and/or electronics. 19 By rule, pull-tabs do have a set price. 20 They're designed such that they sell for a certain 21 amount and the prizes that are awarded based on the 22 configuration of that particular pull-tab deal are set. 23 And so it's a finite number with a set number of gross 24 receipts and set number of prizes. 25 But I just wanted to provide that 30 1 information to kind of give you clarification. A lot of 2 what he's saying was not the Lottery, it was the 3 state -- the Legislature that passed those laws. 4 CHAIRMAN WILLIAMSON: And if I recall 5 correctly, last time this was brought up, most of the 6 other parts of the state really were not interested in 7 this. Is that correct? 8 MR. SANDERSON: That is correct. At the 9 BAC meeting where it was discussed, there was some 10 discussion centered around, "Well, you know, you may 11 want it in your area, but I don't want it in my area." 12 So I believe that's the initial rulemaking -- the 13 petition was that the Lottery Commission just set a 14 minimum, period. And this most recent one -- and I'm 15 not sure about the previous one -- limited it to the San 16 Antonio, whatever the metropolitan area designation is. 17 CHAIRMAN WILLIAMSON: All right. Any 18 other questions or comments? 19 COMMISSIONER SCHENCK: Well, as I 20 mentioned before, I know this has been to the BAC before 21 with respect to this particular petition for a 22 rulemaking. I would like the BAC just to help us, to 23 give us their thoughts, under what circumstances would 24 we trigger the power to set a minimum price under the 25 statute? 31 1 CHAIRMAN WILLIAMSON: So I guess this is 2 an item that we need to have a motion for approval? 3 MS. KIPLIN: Yes. This is an action item. 4 The staff's recommendation is to deny the petition for 5 the reasons that have been stated. It's either you 6 grant the petition or you deny the petition. 7 COMMISSIONER KRAUSE: I'm going to make a 8 motion that we deny the petition. But I would like to 9 make a statement, that I think we need to address the 10 rule that we've got, that limit the number of games that 11 can be played, since that is our rule and not 12 legislative. 13 MR. SANDERSON: The number of card faces? 14 COMMISSIONER KRAUSE: Yes. 15 MR. SANDERSON: Okay. Sorry to 16 interrupt -- 17 CHAIRMAN WILLIAMSON: Go ahead. 18 MR. SANDERSON: -- in the middle of a 19 motion. But when the card-minding rule was amended -- 20 probably four or five years ago is the last amendment -- 21 we had a provision in there that a card face in an 22 electronic card-minding device could not be sold for 23 less than the equivalent of a paper face. 24 It was taken out based on public comment, 25 individuals inquiring that it will be too cumbersome to 32 1 make that decision of how much an actual paper face is 2 being sold for when you're buying sheets of them with 3 different configurations. But we did have that at one 4 point in time, that would have removed the number of 5 card faces and provided a minimum cost on the card- 6 minding device, but the public comment caused that to 7 come out and stayed at 66 card faces. 8 But we can certainly look at it again. 9 And I know it's been in some discussions. I'm right now 10 serving on a -- or chairing up a panel for the North 11 American Gaming Regulators Association. We're 12 developing standards for the card-minding systems in 13 North America, and so we're looking at all different 14 avenues. And hopefully by mid-summer, we'll have those 15 standards approved and we can take another look at our 16 rules as it relates to those standards. 17 CHAIRMAN WILLIAMSON: Okay. So there is a 18 motion out on -- 19 COMMISSIONER SCHENCK: I second the 20 motion. 21 CHAIRMAN WILLIAMSON: All in favor? 22 COMMISSIONER SCHENCK: Aye. 23 CHAIRMAN WILLIAMSON: Aye. 24 COMMISSIONER KRAUSE: Aye. 25 CHAIRMAN WILLIAMSON: Motion passes 3-0. 33 1 And we'll continue to look at this. 2 MR. KELLER: Okay. Thank you. 3 CHAIRMAN WILLIAMSON: Thank you for 4 bringing it up. 5 MS. JOSEPH: I have a T-bar for you. 6 CHAIRMAN WILLIAMSON: Okay. 7 AGENDA ITEM NO. VI 8 CHAIRMAN WILLIAMSON: All right. The next 9 item is report by the Charitable Bingo Operations 10 Director and possible discussion or action on the 11 charitable Bingo Operations Division's activities, 12 including updates on House Bill 1474 implementation and 13 other items. 14 Phil, this is yours. 15 MR. SANDERSON: Commissioners, in your 16 notebook is the report of the bingo activities for the 17 month of April. And I'll be glad to answer any 18 questions you may have. 19 CHAIRMAN WILLIAMSON: Commissioners, do 20 you have any questions? 21 COMMISSIONER KRAUSE: No, ma'am. 22 COMMISSIONER SCHENCK: No. 23 CHAIRMAN WILLIAMSON: All right. Thank 24 you. 25 34 1 AGENDA ITEM NO. VII 2 CHAIRMAN WILLIAMSON: Let's see. The next 3 item is report, possible discussion and/or action on 4 lottery sales, revenue, game performance, advertising, 5 marketing trends. 6 Kathy and Robert, this is your item, 7 please. 8 MS. PYKA: Good morning, Commissioners. 9 My name is Kathy Pyka, Controller for the Commission. 10 And to my right is Robert Tirloni. He's out Products 11 Manager. 12 And our first slide that we have for you 13 this morning includes comparative sales through the week 14 ending May 15, 2010. Total sales for Fiscal Year 2010 15 through this 37-week period are $2.69 billion, an 16 increase of $81.8 million over the $2.61 billion figure 17 for Fiscal Year 2009. 18 Our instant ticket sales for Fiscal Year 19 2010 reflected on the second blue bar are at 20 $1.98 billion, a 14 and a half million dollar increase 21 over the previous Fiscal Year 2009. And our Fiscal Year 22 2010 on-line sales included on the second red bar are 23 $707.6 million, a $67.3 million gain over the prior 24 fiscal year. 25 Our next slide reflects cumulative average 35 1 daily sales for Fiscal Years 2008, 2009 and 2010. As 2 reflected by the total cumulative sales on the previous 3 slide, our daily average for Fiscal Year 2010 continues 4 to exceed the two previously fiscal years. Through the 5 37th week of the fiscal year, our daily average for 6 Fiscal Year 2010 is $10.7 million, reflecting an 7 increase of four and a half percent over Fiscal Year 8 2008 sales and an increase of 5.4 percent over Fiscal 9 Year 2009 sales. 10 The jackpot games are included in the 11 white font at the top of the chart, and you'll see that 12 our jackpot games include a $1.8 million daily average 13 which is just over $500,000 of an increase over the 14 prior two fiscal years. And as we break down that 15 increase, you'll see that much of the increase is with 16 the Lotto Texas jackpot game, which includes a daily 17 average of 769,000, as compared to daily averages of 18 over $500,000 for the previous two fiscal years. And 19 then the balance of the increase is attributed to the 20 Powerball and Powerplay games, at $264,000 and $61,000 21 and is a daily average this fiscal year. 22 Our daily games are in the green font. 23 And, as you see, we're at a little bit over $1.1 million 24 is the daily average, which is just under the prior two 25 fiscal years for daily games. The Daily 4 game does 36 1 include an increase over the previous fiscal years, with 2 an average of $145,000 per day. And then again, the 3 instant sales include a daily average of $7.7 million, 4 which is just between the two previous fiscal years. So 5 again, we've got the overall increase of daily average 6 at $10.6 million, compared to prior fiscal years. 7 With that, Robert will now include a 8 review of sales by game. 9 MR. TIRLONI: Good morning, Commissioners. 10 For the record, my name is Robert Tirloni, and I'm the 11 Products Manager for the Commission. 12 This slide is fiscal year-to-date sales 13 through the week ending May 15th, and it's a comparison 14 of Fiscal 2010 -- 15 MR. GRIEF: Robert, your microphone is not 16 working. 17 MR. TIRLONI: Sorry about that. 18 This is a slide, fiscal year-to-date sales 19 comparison, comparing Fiscal 2010 to Fiscal 2009. The 20 format of the slide is very similar to the one Kathy 21 just covered. 22 Again, at the top in white are our jackpot 23 games. And as a whole, the jackpot games are realizing 24 an almost $80 million gain over the previous fiscal 25 year. We've been fortunate with jackpot rolls this 37 1 fiscal year, and we have three very good-sized jackpots 2 currently for Lotto Texas, Powerball and Mega 3 Millions -- I'm sorry -- and Texas Two-Step is at an 4 extremely high jackpot for the game right now. 5 The daily games are in green. As Kathy 6 mentioned, we're seeing good games on Daily 4. Some of 7 our other daily games are experiencing decline. But 8 overall, the on-line category is up over $67 million. 9 And we have had about 10 or 11 consecutive weeks of 10 strong year-over-year or week-over-week growth in the 11 instant category. 12 And we have a brand-new suite of games 13 that I talked to y'all about last month. Our Jumbo 14 Bucks suite just started on Monday, so we are hoping 15 that that suite of games will continue to drive instant 16 sales through the remainder of the summer months. And 17 so in total, we are up year-over-year by just under 18 $82 million. 19 And that concludes our sales report for 20 this month, but we're happy to answer any other 21 questions that you might have. 22 CHAIRMAN WILLIAMSON: Commissioners, do 23 you have any questions? 24 COMMISSIONER KRAUSE: No, ma'am. 25 CHAIRMAN WILLIAMSON: All right. Thank 38 1 you. 2 AGENDA ITEM NO. VIII 3 CHAIRMAN WILLIAMSON: Let's go to the next 4 item, No. VIII, transfers to the state and agency's 5 budget status. 6 MS. PYKA: Thank you, Madam Chair. Again, 7 Kathy Pyka, Controller for the Lottery Commission. 8 The first report, Commissioners, in your 9 notebook reflects the transfers and allocations to the 10 Foundation School Fund, the Texas Veterans Commission 11 and the allocation of unclaimed prizes for the period 12 ended March 31, 2010. 13 0ur total cash transfers to the state 14 amounted to $612.9 million for the first seven months of 15 the fiscal year. And as we break down that 16 $612.9 million transfer to the state, $556.7 million was 17 the amount transferred to the Foundation School Fund. 18 $4.1 million was the amount transferred to the Texas 19 Veterans Commission, with a balance of $52.5 million 20 transferred to the state from unclaimed lottery prizes. 21 Commissioners, this represents a 1.52 percent increase, 22 or $8.4 million, over the amount transferred to the 23 Foundation School Fund at this period last fiscal year. 24 Also included in your notebook is a report 25 of lottery sales, expenditures and transfers from Fiscal 39 1 Year 1992 to present. And our total cumulative 2 transfers to the Foundation School Fund through March of 3 this year totaled $12.2 billion. 4 Commissioners, the final item under this 5 tab is our agency's Fiscal Year 2010 method of finance 6 summary for the second quarter, ending February 28th of 7 2010. Our Lottery Commission budget funded out of the 8 dedicated account is $205 million. And of this amount, 9 78.3 percent was expended and encumbered through the end 10 of the second quarter. 11 The Bingo Operations budget funded by 12 general revenue is 15 and a half million dollars, with 13 54.2 percent expended and encumbered through the end of 14 the second quarter. 15 This concludes my presentation. I would 16 be happy to answer any questions. 17 CHAIRMAN WILLIAMSON: Commissioners, do 18 you have any questions? 19 COMMISSIONER SCHENCK: No. 20 CHAIRMAN WILLIAMSON: Thank you. 21 AGENDA ITEM NO. IX 22 CHAIRMAN WILLIAMSON: Go on to Item IX, 23 the five percent biennial budget reduction for 2010- 24 2011. 25 MS. PYKA: Again for the record, Kathy 40 1 Pyka, Controller for the Commission. 2 Commissioners, on the 17th of May, we 3 received a letter from state leadership granting our 4 exemption request for the $1,263,550 exemption on the 5 five percent reduction related to the bingo prize fee 6 allocation pass-through appropriation. This now leaves 7 our five percent reduction target for Fiscal Years 2010 8 at $289,798, which is the funding associated with the 9 bingo administrative reduction. 10 And for background purposes, this 11 reduction included salary lapses, accrued salary lapses 12 as well as the delayed hiring of several positions in 13 Bingo. And I wanted to share at this point in time, 14 through our calculation of April 30th, the Bingo 15 Division has generated sufficient salary lapses to cover 16 the $289,000 reduction. There is just a little bit in 17 under-filled dollars. Phil will continue to reserve 18 through Fiscal Year 2011, but we have captured all the 19 funds. Of course, we still don't know any more about 20 the reduction for '12 and '13, but we do at least have 21 the '10 and '11 issue resolved. 22 I would be happy to answer any questions. 23 CHAIRMAN WILLIAMSON: Commissioners, do 24 you have any questions? 25 COMMISSIONER SCHENCK: Well, I'm really 41 1 glad that we got that agreement out of the legislative 2 leadership. That was very important. 3 And, Phil, I know we've talked in the past 4 about getting these positions filled. I really am 5 hoping to -- I know you're already working hard on doing 6 that, and I think that's great. We really need to get 7 these auditors out in the field. I really want to see 8 what's going on in those bingo halls and particularly 9 where these 8-liners are and cracking down. 10 MR. SANDERSON: Yes, sir. 11 MS. PYKA: Thank you, Commissioners. 12 CHAIRMAN WILLIAMSON: Thank you. 13 AGENDA ITEM NO. X 14 CHAIRMAN WILLIAMSON: Item X. The next 15 item is consideration of and possible discussion and/or 16 action, including proposal, on amendments to 16 TAC 17 401.315 relating to Mega Millions on-line game rule. 18 Pete, this is your item, please. 19 MR. WASSDORF: Thank you, Chairman. Good 20 morning, Commissioners. My name is Pete Wassdorf, in 21 the Legal Services Division. And we have four 22 proposals, rulemaking proposals for you for your 23 consideration today. 24 The first one with respect to Item No. X, 25 the amendment contains four substantive provisions. The 42 1 amendment proposes that in each Mega Millions game 2 series, that the initial jackpot will be a guaranteed 3 $12 million and thereafter in subsequent grand jackpot 4 prizes for that particular series will be estimated 5 jackpot prizes, and the payments will be based on actual 6 sales. 7 This is an agreement that has been reached 8 in principle with the Mega Millions states, and we do 9 not yet have a signed agreement, but we're asking for 10 the rule to be initiated anyway and that you -- included 11 in the rule is permission for the Executive Director to 12 have specific authority to implement the game pursuant 13 to the rule that is proposed so as to control the timing 14 of the implementation of that, in coordination with the 15 other Mega Millions states. 16 The second substantive proposal with 17 respect to this rule, this proposed amendment to the 18 rule, is that in the case a Megaplier option is 19 purchased, that the second tier prize, rather than being 20 multiplied, will become a guaranteed prize of one 21 million dollars. This is also an agreement of the Mega 22 Millions states, and it's to bring the Mega Millions 23 game on to par with the Powerplay provision of the 24 Powerball game. 25 The third substantive provision is to 43 1 allow a special Megaplier promotion to be implemented 2 periodically, at the discretion of the Executive 3 Director, when the multi-jurisdictional participants in 4 the Mega Millions games agree to do so. 5 And the last substantive change is to 6 change the wording of the rule to be consistent with a 7 possible change of the drawing location for the 8 Megaplier option from Texas to Georgia. In the past, 9 the other Mega Millions states have not participated in 10 the Megaplier game. But now that many of them have 11 adopted the Powerball and Powerball has a multiplier 12 feature, they also, the Mega Millions states also would 13 have like to have a multiplier feature. And it makes 14 sense to have that drawing done at the same location and 15 time as the Mega Millions drawing, and that is currently 16 done in Georgia. 17 The last two items for this proposed 18 amendment is that it will delete some obsolete or 19 redundant provisions of the Mega Millions rule, and then 20 it will make some minor clarifications to provisions 21 that were thought to be unclear. 22 I would be happy to answer any questions. 23 CHAIRMAN WILLIAMSON: Commissioners, do 24 you have any questions? 25 COMMISSIONER SCHENCK: I had a couple of 44 1 questions. During my briefing on this matter, I 2 suggested there is a -- I understood that the delegation 3 of authority to the Executive Director to act as he sees 4 fit in implementing these rules is by implication, and I 5 would like to see explicit, made to be tied to be 6 consistent -- to the extent his actions are consistent 7 with this rule and not some free-wheeling delegation to 8 rewrite the rule. And my understanding is that where 9 there is a decision by the Executive Director to make an 10 alteration or modification, that that act will be made 11 available to the public. 12 MR. WASSDORF: We placed a modified 13 version at your stations this morning. 14 COMMISSIONER SCHENCK: Okay. That's why I 15 have the modified rule. Okay. Well, very good. 16 Thanks. 17 Also on the estimates after the initial 18 drawing, Gary, how close are we when we do estimated 19 jackpots, in terms of percentages? Can he be off, in 20 your experience, by more than one or two percent? 21 MR. GRIEF: Commissioner, there's two 22 factors that come into play. One is the sales estimate. 23 And I can tell you that the sales estimate by and large 24 across this country comes in very, very close. There is 25 an inconsequential difference typically in that regard, 45 1 unless there's some type of weather-related issue that 2 comes up unexpectedly somewhere. 3 What really comes into play more is the 4 interest factor that can change over a two- or three-day 5 period. And we have seen that occur where it's either 6 risen or dropped rather dramatically, especially as you 7 roll up into the higher jackpots where more of your 8 jackpot is being funded via the interest that can be 9 gained over the 20-year period it's being paid out. 10 The reason we're moving from guaranteed to 11 estimated is exactly that, the risk that comes into 12 play, especially now that we're adding population and, 13 therefore, sales and play to this game. We also 14 anticipate that perhaps the State of Florida may join at 15 some point in the future. So we see that risk being 16 compounded even further, which makes it prudent on our 17 part, we believe, to move from guaranteed to estimated. 18 COMMISSIONER SCHENCK: Well, I'm just 19 trying to figure out how far off these estimates might 20 be so that when we have a disgruntled winner, which is a 21 hard thing to imagine, but if a jackpot has been 22 advertised at $120 million, are they going to be saying 23 "I got $80 million," which would -- I mean, $40 million. 24 You know, if I had $120 million, I would be annoyed if 25 someone took $40 million. 46 1 MR. GRIEF: Right. 2 COMMISSIONER SCHENCK: Are we talking 3 about a couple of million? Because it seems to me when 4 we had this discussion in connection with the Powerball, 5 there was a history there, and it was pretty small. But 6 to the extent there was a mis-estimate of what the sales 7 or the interest factor was going to generate, it was, 8 you know, $118 million as opposed to 119 or 120. Is 9 that the same order of magnitude that we're thinking 10 about here? 11 MR. GRIEF: You're exactly correct. The 12 risk comes into play. Our hope, of course, is that by 13 cross-selling both games, we eventually move into a 400, 14 perhaps even $500 million jackpot situation. Of course, 15 interest factors, anticipated sales will weigh more into 16 that. 17 I think looking into the past, Kathy, 18 you've got a really good handle on what the misses have 19 been and how big those misses have been. Can you speak 20 to that? 21 MS. PYKA: I totally agree with you. 22 They're insignificant. The greater concern is 23 definitely the interest factor that Gary alluded to. 24 And, Commissioner, the biggest change is with the 25 additional states, the timing of the transfer of funds 47 1 from the selling states to the billing state. There is 2 now a 14-day period. And so when -- 3 COMMISSIONER SCHENCK: Who gets that 4 float? The transferor state is taking the interest in 5 that 14-day period? 6 MS. PYKA: What we're doing is, we're 7 eliminating that risk on that float by moving to an 8 estimated sales jackpot. There is no risk left with the 9 state. The state is going to buy the annuities that 10 come with the cash equivalent that is transferred to 11 them at that 14th day; whereas, if we were guaranteeing, 12 there would be a risk or a gain in the scenario that 13 you're describing of that 14-day period, if the factor 14 were to go up or down over the period. And so what we 15 would be doing is transferring the cash equivalent of 16 the sales that were generated for that jackpot, rounded 17 to the next million, fully funded million. 18 COMMISSIONER SCHENCK: Across the country? 19 MS. PYKA: That is correct. 20 COMMISSIONER SCHENCK: And then the 21 winning state is the state responsible for paging the 22 tickets? 23 MS. PYKA: Yes. 24 COMMISSIONER SCHENCK: And the rest of the 25 states that aren't winners, they're not incentivized to 48 1 slow pay the game receipts from their period as a result 2 of this, are they? 3 MS. PYKA: No. The procedures are very 4 clear with regard to the timing of the transfer of 5 funds. But that's our biggest issue on that, interest 6 factor risk, is the timing of the transfer of funds. 7 COMMISSIONER SCHENCK: Okay. And then 8 again, if I'm the winner, what am I looking at? If I 9 saw a big billboard that told me $150 million, am I 10 likely to merely get 120? 11 MS. PYKA: No. Just as Gary described, 12 you're looking at a couple or a few million dollars most 13 often. 14 COMMISSIONER SCHENCK: Which is about one 15 or two percent? 16 MS. PYKA: Correct? 17 COMMISSIONER SCHENCK: Okay. All right. 18 And then my last question. I know it's, from a 19 structural standpoint, a lot simpler and cleaner to do 20 the Megaplier. Is that the drawing in Georgia as 21 opposed to Texas? Is anyone going to lose their job 22 here in Texas as a result of that? 23 MR. GRIEF: Absolutely not. Absolutely 24 not, Commissioner. 25 COMMISSIONER SCHENCK: We're not going to 49 1 lose any money? Are we going to save money as a result 2 of this? 3 MR. GRIEF: It will be more of a risk 4 factor that will be moved from the Texas Lottery to the 5 Mega Millions group as a whole. 6 COMMISSIONER SCHENCK: So we're shedding 7 risk, no one is losing their job, and we're not spending 8 any more money? 9 MR. GRIEF: Correct. 10 COMMISSIONER SCHENCK: Okay. 11 CHAIRMAN WILLIAMSON: All right. This is 12 an action item? 13 MS. KIPLIN: This is an action item. 14 Staff is recommending that you approve publishing these 15 amendments for public comment in the Texas Register. 16 CHAIRMAN WILLIAMSON: All right. Is there 17 a motion on this? 18 COMMISSIONER SCHENCK: I move that we 19 publish this proposed rule in the Texas Register. 20 CHAIRMAN WILLIAMSON: Is there a second? 21 COMMISSIONER KRAUSE: Second. 22 CHAIRMAN WILLIAMSON: All in favor? 23 COMMISSIONER SCHENCK: Aye. 24 CHAIRMAN WILLIAMSON: Aye. 25 COMMISSIONER KRAUSE: Aye. 50 1 CHAIRMAN WILLIAMSON: The vote is 3-0. 2 AGENDA ITEM NOS. XI AND XII 3 CHAIRMAN WILLIAMSON: On to Item XI. 4 MS. KIPLIN: And, Commissioners, I have 5 T-bar memos for each of these rulemaking items. I can 6 give them to you piecemeal or it can wait till the end, 7 whatever you prefer. I can give you the T-bar memos 8 piecemeal or wait till the end. 9 CHAIRMAN WILLIAMSON: Why don't you go 10 ahead and give us that, the one that we just did. 11 We're taking a very short two-minute 12 unofficial break. 13 (Off the record) 14 CHAIRMAN WILLIAMSON: Pete, let's go ahead 15 and start with this next one. 16 MR. WASSDORF: Chairman, if it's all right 17 with you, I would like to do XI and XII together. XI 18 and XII are related. In the 75th Legislature, the 19 Legislature passed two statutes that had the same 20 identical statute number. 21 CHAIRMAN WILLIAMSON: If you would, go 22 ahead and read in what XI and XII specifically refer to. 23 MR. WASSDORF: I beg your pardon. Thank 24 you. Item XI is consideration and possible discussion 25 and/or actio, including proposal, on new rule 16 TAC 51 1 401.318 relating to withholding of delinquent child 2 support payments from lump sum and periodic payments of 3 lottery winnings in excess of $600. 4 And Item XII is consideration of and 5 possible discussion and/or action, including proposal, 6 on new rule 16 TAC 401.319 relating to withholding of 7 child support payments from periodic payments -- 8 periodic installment payments of lottery winnings. 9 As I was saying, the Legislature passed 10 two statutes that had identical numbers and dealt with 11 the same subject matter at the 75th Legislature. Both 12 statutes authorized the collection of child support 13 payments from lottery winnings of non-custodial parents. 14 One of the statutes allows for collection 15 of only delinquent child support payments from any 16 prize, whether a lump sum prize or a periodic prize 17 under 466.402(b), and that applies to all winnings over 18 $600. And this provides for them to file a certified 19 copy of a court order or writ of withholding or notice 20 of lien with the Lottery Commission, and the Lottery 21 Commission should -- the person against whom the writ or 22 lien applies, should they be a winner, then that money 23 will be withheld. 24 The other statute allows for collections 25 of either delinquent or non-delinquent child support 52 1 payments but only from periodic installments. Upon the 2 filing of a certified copy of a court order, writ of 3 withholding or notice of lien, the order, writ or lien 4 in that particular case must direct that payment be in 5 the same manner in which the periodic installments are 6 being paid. And by "same manner," it means the same 7 period. 8 And TLC, the Lottery Commission, is not 9 required to accept a copy of an order or writ under that 10 statute until the Executive Director has determined that 11 there is a periodic installment prize to which the 12 winner is entitled. 13 So in the first instance, a non-custodial 14 parent may file an order or writ with us at any time, 15 and we'll keep it on file and check it regularly to make 16 sure that any prize winnings are deducted if the person 17 against whom the order is made. 18 In the second instance, it will be done 19 really after a prize winner has -- a person has won a 20 prize. Then the non-custodial parent can get an order 21 from the Court for us to withhold payments in the same 22 time period or term and give that to us. 23 And if you have any questions with respect 24 to that, I will be happy to answer them. 25 CHAIRMAN WILLIAMSON: So from what I 53 1 understand, currently when there is a winner, we do 2 check with the AG's office to see if there is 3 anything -- explain that a little further for us, Kim. 4 So explain currently what we have in place. 5 MR. WASSDORF: Yes. The Attorney General 6 acts as the collection agent under a IV-D section of a 7 federal statute. They're the collection agent for all 8 non-custodial parents who are obtaining some type of aid 9 to families of dependent children -- with dependent 10 children or other federal welfare benefits. 11 And so probably -- it's hard to find out 12 what percentage that is, but it's somewhere in the 13 50 percent range of all child support payments are 14 collected by the Attorney General. Well, we have been 15 checking on those for years and will continue to do so. 16 This is for the other 50 percent of 17 parents who are not receiving public benefits and are 18 not represented by the Attorney General, that they can 19 file an order with us in the event that a non-custodial 20 parent -- or a custodial -- or a non-custodial parent is 21 a prize winner. 22 MS. KIPLIN: I guess maybe just to follow 23 up on the wider scope of your question, since the 24 beginning of the lottery, the existence of the lottery, 25 there has been a statute that requires deduction from 54 1 prizes. Child support, administered by the Office of 2 the Attorney General, is one, but it's also taxes that 3 are owned to the state, any defaults on loans under the 4 guaranteed student loan programs, any kind of 5 delinquency and reimbursing help, Department of Human 6 Services for errors under the food stamp program. 7 Just so you know, that's been going on. 8 And the way that works is, if we have somebody that 9 comes into a claim center or to the Lottery, they're run 10 against these -- we'll call them, for lack of a better 11 word, you know, holds that have been put on them, and 12 then that amount would be deducted or they're told that 13 they need to go pay it off before we can pay that prize. 14 CHAIRMAN WILLIAMSON: Great! 15 Commissioners? 16 COMMISSIONER SCHENCK: That's very 17 helpful. I wasn't aware of the distinction between 18 those who are getting support from the AG's office and 19 those who are not. And I worry a little bit that this 20 is probably not well-known or well-publicized, certainly 21 our rule, because this exists as -- but among the family 22 law bar, among family law judges. Is there anything we 23 can do to get the word out, Tim or Pete, to the bar so 24 that they know when they've got a child support order, 25 that one of the routine things they should do is get the 55 1 order down to us so that we can protect their child 2 support? 3 MR. WASSDORF: We probably could. I don't 4 know how many total prize winners there are to which 5 this would apply. I did ask Kathy Pyka with respect to 6 installment payments. I think that the number of 7 installment accounts was somewhere in the neighborhood 8 of 420 or 30. 9 COMMISSIONER SCHENCK: I'm thinking, 10 though, one of these rules would apply not just to the 11 installments, though. 12 MR. WASSDORF: Right. 13 COMMISSIONER SCHENCK: But I'm worried 14 about in the future, you know, we have a guy who, let's 15 say, wins a Mega Million prize of $100 million, under 16 child support obligations somewhere here in Texas, comes 17 down to the Lottery Commission the next day, collects 18 it, because there isn't already anything on file with 19 us, and rules to that. 20 MS. KIPLIN: Sure. Commissioner, to your 21 point, you know, I can check with the State Bar of Texas 22 in terms of members of the family law section, we can 23 see if we can't work something out that -- 24 COMMISSIONER SCHENCK: Am I correct, we're 25 not calling for a fee for anyone who wants to file one 56 1 of these things with us? 2 MR. WASSDORF: No. 3 MS. KIPLIN: No. This is just, say, the 4 writ of withholding itself or the order of delinquency. 5 COMMISSIONER SCHENCK: So if you're a 6 family law lawyer -- you have to protect yourself in 7 some ways even -- you might want, just as a routine 8 matter, make a copy of that order and send it down here 9 to Austin to make sure it's on file, in case there is a 10 major lottery prize that might be affected. 11 MR. WASSDORF: Yes. 12 MS. KIPLIN: I just received a handwritten 13 note that Mr. Bresnen, who is in the audience, indicates 14 that he represents the family law bar, and so I'll be 15 happy to visit with him. 16 COMMISSIONER SCHENCK: Good. 17 MS. KIPLIN: And we can see if there is 18 something that we might be able to work out in terms of 19 getting the word out. Now, at this point I will say 20 that this rule is -- the staff is recommending that you 21 vote to approve the publication of these rules for 22 public comment. 23 COMMISSIONER SCHENCK: Well, speaking for 24 myself, that's enough of a no-brainer that I'm a "Yes" 25 on. I just wanted to make sure, to the extent there's 57 1 children out there in this state that aren't getting 2 their child support, that somebody -- the non-custodial 3 parent winning a lot of money from us doesn't get in a 4 position where they can run off with it and the children 5 don't get taken care of, so whatever we can do to make 6 that less likely to happen, I'm for. 7 COMMISSIONER KRAUSE: I second the motion. 8 CHAIRMAN WILLIAMSON: Do you have any 9 other questions? 10 Okay. Let's take these one at a time. 11 Let's make a motion on the first item, on the lump sum 12 and periodic payments in excess of $600. So do you want 13 to make a motion to post that? 14 COMMISSIONER SCHENCK: I move that we post 15 that for possible adoption and for public comment -- for 16 public comment at this point. 17 CHAIRMAN WILLIAMSON: Thank you. 18 COMMISSIONER KRAUSE: Second. 19 CHAIRMAN WILLIAMSON: Second. All in 20 favor? 21 COMMISSIONER SCHENCK: Aye. 22 CHAIRMAN WILLIAMSON: Aye. 23 COMMISSIONER KRAUSE: Aye. 24 CHAIRMAN WILLIAMSON: Passes 3-0. Okay. 25 Is there a motion for the next item, 58 1 withholding of child support payments from periodic 2 installment payments of lottery winnings? Is there a 3 motion? 4 COMMISSIONER SCHENCK: I move that we also 5 publish that for public comment. 6 COMMISSIONER KRAUSE: Second. 7 CHAIRMAN WILLIAMSON: All in favor? 8 COMMISSIONER SCHENCK: Aye. 9 CHAIRMAN WILLIAMSON: Aye. 10 COMMISSIONER KRAUSE: Aye. 11 CHAIRMAN WILLIAMSON: Motion passes 3-0. 12 MS. KIPLIN: And I have two T-bar memos. 13 AGENDA ITEM NO. XIII 14 CHAIRMAN WILLIAMSON: All right. On to 15 Item XIII, consideration of and possible discussion, 16 including proposal, on new rule 16 TAC 401.371 relating 17 to collection of delinquent obligations for lottery- 18 related accounts. 19 Pete, if you'll continue, please. 20 MR. WASSDORF: Thank you, Chairman. This 21 is another collection issue. And there is a statute, 22 Section 2107.002 of the Government Code which requires 23 that all state agencies that collect delinquent 24 obligations owed to the agency shall establish 25 procedures by rule for collecting a delinquent 59 1 obligation and set a reasonable time period for 2 collection before it's referred to the Attorney 3 General's office. 4 This statute has been around for a while. 5 The statute also provided that in the event that we had 6 not done this, that we would automatically be subject to 7 the rules of the Attorney General on collection, and 8 we've been relying on that. But it has been brought to 9 our attention by the Internal Auditor that we had not 10 adopted a rule. And so this is a proposed rule to come 11 into compliance with Section 2107.002 of the Government 12 Code. 13 Basically we've adopted many of the 14 provisions of the Attorney General's rules with respect 15 to this. The basic deviation is that instead of 60 16 days, we're asking for 180 days to work on collection 17 before referring to the Attorney General's office. And 18 the reason for that is because we have so many different 19 enforcement type actions that we go from one to the next 20 to the next, and it takes a little bit longer. But at 21 180 days, the Attorney General has agreed that that 22 won't inhibit them from pursuing their collection 23 efforts. 24 CHAIRMAN WILLIAMSON: Any discussions, 25 Commissioners? 60 1 COMMISSIONER SCHENCK: Just so I'm clear, 2 there is nothing in here that will reduce our ongoing 3 multiple arrows for attacking the delinquent retailers, 4 like going after the principals of the organization or 5 anything else? 6 MS. KIPLIN: That's correct. 7 MR. WASSDORF: No. As a matter of fact, 8 if we want to pursue them in a court suit, this will 9 allow the Attorney General to do that for us. And the 10 180 days is the maximum period. We can always speed 11 that up and submit it to them at an earlier date. 12 CHAIRMAN WILLIAMSON: Thank you. 13 Is there a motion? 14 COMMISSIONER SCHENCK: I move that we 15 publish proposed new Rule 401.371. 16 CHAIRMAN WILLIAMSON: Is there a second? 17 COMMISSIONER KRAUSE: Second. 18 CHAIRMAN WILLIAMSON: All in favor? 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN WILLIAMSON: Aye. 21 COMMISSIONER KRAUSE: Aye. 22 CHAIRMAN WILLIAMSON: Vote is 3-0. 23 At this time we'll take a 15-minute break. 24 It is 10:15. 25 MS. KIPLIN: And, Commissioners, I have a 61 1 T-bar memo on this one as well. 2 (Off the record: 10:15 a.m. to 3 10:30 a.m.) 4 CHAIRMAN WILLIAMSON: We're back in 5 session. It's 10:30. 6 AGENDA ITEM NO. XIV 7 CHAIRMAN WILLIAMSON: Item XIV is report, 8 possible discussion and/or action on the lottery 9 operations and services procurement. 10 Toni, I believe this is you today? 11 MS. ERICKSON: That is me. Good morning, 12 Commissioners. For the record, Toni Erickson, Support 13 Services Manager. I have two updates under the agenda 14 item. First I want to provide a notice that the agency 15 received a request to extend the deadline for proposals. 16 In response to that request, we extended the deadline by 17 30 days. The new due date for cost proposals is 18 June 29th, and the new due date for technical proposals 19 is June 30th. 20 Next is, it's directly related to this 21 agency item. I wanted to provide notice that the agency 22 is going to issue a request for proposals for an 23 internal control system. The current system is provided 24 by a subcontractor of GTECH under the current lottery 25 operator contract. 62 1 During the drafting of the new lottery 2 operator RFP, a decision was made to remove this, this 3 requirement, and have the agency issue a proposal for 4 that and contract for that directly. 5 That's all I have. If you have any 6 questions, I would be happy to answer them. 7 CHAIRMAN WILLIAMSON: Commissioners, do 8 you have any questions? 9 COMMISSIONER KRAUSE: I had a question 10 about this extension, and that is that it was requested? 11 MS. ERICKSON: Yes. 12 COMMISSIONER KRAUSE: Okay. And we 13 granted it. And then did we ever get any feedback, you 14 know, from the requester saying that if we made this, 15 that they would actually respond? 16 MS. ERICKSON: We have received no 17 feedback from any vendor since we posted that, specific 18 to the extension. 19 COMMISSIONER KRAUSE: Okay. Well, I'm 20 going to go on public record as saying that since they 21 asked for the extension, I expect to see something from 22 them. 23 MS. ERICKSON: That is our hope. 24 CHAIRMAN WILLIAMSON: Thank you. 25 Any other? 63 1 COMMISSIONER SCHENCK: Well, I just want 2 to say I think it was the right decision, Gary, to award 3 this extension, and I think it's in the best interest of 4 the lottery. And I appreciate your bending over 5 backwards to make it as easy as possible for us to get 6 as many bids as possible. 7 CHAIRMAN WILLIAMSON: Thank you. 8 MS. ERICKSON: Thank you. 9 AGENDA ITEM NO. XV 10 CHAIRMAN WILLIAMSON: On to Item XV, 11 report, discussion, action on the 81st or 82nd 12 Legislature. Nelda. 13 MS. TREVINO: Good morning Commissioners. 14 For the record, I'm Nelda Trevino, the Director of 15 Governmental Affairs. And, Commissioner Schenck, at the 16 last Commission meeting, you asked about some dates for 17 the next legislative session. So this morning I've 18 provided you a little handout that lists some 19 legislative dates of interest. 20 And you'll note that on November 8, 2010, 21 that's the first day for pre-filing of legislation for 22 the 82nd Legislature. And on January 11, 2011, that's 23 when the regular session of the Legislature will convene 24 for 140 days. So again, I just wanted to follow up and 25 provide you this so that you could have it for 64 1 reference. 2 Lastly, interim committee hearings are 3 continuing to occur, and the agency's Governmental 4 Affairs Division is continuing to monitor the action of 5 these hearings. And we will keep you advised of any 6 requests or actions that may come from these committees 7 and that may impact the agency. 8 This concludes my report, and I will be 9 glad to answer any questions. 10 CHAIRMAN WILLIAMSON: Commissioners, do 11 you have any questions? 12 COMMISSIONER SCHENCK: No. Thank you. 13 Very handy. 14 CHAIRMAN WILLIAMSON: Thank you, Nelda. 15 AGENDA ITEM NO. XVI 16 CHAIRMAN WILLIAMSON: On to Item XVI, 17 consideration of report, possible discussion and action 18 on external and internal audits and reviews relating to 19 the Texas Lottery Commission and the Internal Audit 20 Department, including an internal audit on jackpot 21 estimation. 22 And today we have Dale Hernandez to 23 provide that report for us. 24 MS. HERNANDEZ: Good morning, 25 Commissioners. For the record, I am Dale Hernandez with 65 1 the Internal Audit Division, and I'm here on behalf of 2 Catherine Melvin who could not be here today. She asked 3 that I brief you on a few items. 4 The first is the annual financial audit. 5 The firm Maxwell Locke & Ritter has been engaged to 6 conduct our statutorily required annual financial audit. 7 They will also be conducting an annual agreed-upon 8 procedures engagement related to Mega Millions 9 transactions, as required by the Mega Millions agreement 10 documents. 11 The formal entrance conference was held 12 yesterday, with Chair Williamson in attendance. They 13 will be on-site this summer to conduct their interim 14 work, and we expect them to return later in the fall to 15 complete their review. And I believe Catherine intends 16 to introduce the auditors at the next Commission 17 meeting. 18 The second item is the State Auditor's 19 office, audit of the Charitable Bingo Operations 20 Division. That audit remains ongoing, and we have no 21 additional information from the state auditors at this 22 time. 23 And then lastly is a recently completed 24 internal audit of jackpot estimations. The objective of 25 the audit was to verify the jackpot estimations and the 66 1 resulting advertised amounts are derived in accordance 2 with Commission policies and procedures. In addition, 3 we sought to assess relevant controls to assure the 4 objectives are met. At the time of our audit, Texas had 5 not yet elected to participate in the Powerball game, so 6 the review included Lotto Texas, Mega Millions and Texas 7 Two-Step. 8 Overall, based on the results of our 9 review and testing, jackpot estimations and the 10 resulting advertised jackpot amounts are derived in 11 accordance with agency policies and procedures. 12 However, we did note some opportunities to strengthen 13 controls and provided recommendations to management. 14 Management has indicated their agreement with the 15 recommendations. Internal Audit would like to thank the 16 Office of the Controller and the Lottery Operations 17 Division for their cooperation and assistance during 18 this project. 19 And that concludes my presentation, and I 20 would be happy to answer any questions. 21 CHAIRMAN WILLIAMSON: Commissioners, do 22 you have any questions? 23 COMMISSIONER SCHENCK: One quick question. 24 Powerball we didn't audit, obviously, for the obvious 25 reason that you mentioned. We have, as I recall on your 67 1 work plan for the year, some time left. Maybe Catherine 2 is a better person to answer this question. Is there a 3 possibility of doing a Powerball audit for prize 4 estimation later this year, or is that something we will 5 need to look at next year? 6 MS. HERNANDEZ: We certainly can include 7 it for future consideration. As far as the timeline 8 goes, Catherine probably would be the better person to 9 ask. 10 COMMISSIONER SCHENCK: Okay. 11 MS. HERNANDEZ: But I'll pass that along 12 to her. 13 COMMISSIONER SCHENCK: I would appreciate 14 that. Thank you. 15 MS. HERNANDEZ: Yes. 16 CHAIRMAN WILLIAMSON: All right. Thank 17 you. 18 MS. HERNANDEZ: Thank you. 19 CHAIRMAN WILLIAMSON: Appreciate that. 20 AGENDA ITEM NO. XVII 21 CHAIRMAN WILLIAMSON: On to Item XVII, 22 report on GTECH. 23 MR. GRIEF: Commissioners, other than the 24 information that's in your notebooks, I have nothing 25 further to report on that item. 68 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN WILLIAMSON: Then let's just go 3 on to Item XVIII, report by the Executive Director on 4 the agency. 5 MR. GRIEF: And again, Madam Chairman, 6 other than what is in your notebooks today, I have 7 nothing further to add. 8 CHAIRMAN WILLIAMSON: Commissioners, do 9 you have any questions on any of these? 10 COMMISSIONER SCHENCK: One question. 11 Gary, I understand what half FTE is. What 12 is a quarter FTE? Apparently, we are working on a 13 quarter. 14 MR. GRIEF: It's actually, I believe, the 15 flip of that, Commissioner. We have one employee, I 16 believe, who is operating at three-quarters time, which 17 leaves a quarter free. 18 COMMISSIONER SCHENCK: Okay. Well, very 19 good. That makes sense. Sorry. 20 AGENDA ITEM NO. XIX 21 CHAIRMAN WILLIAMSON: Okay. Let's go on 22 to Item XIX, status and possible entry of orders in 23 cases posted on the agenda. 24 Kim, this is your item, please. 25 MS. KIPLIN: Commissioners, in your 69 1 notebooks today, I would like to take Items A through D. 2 These are lottery revocation cases. In each one of 3 these cases, it was due to insufficient funds being 4 available at the time that the lottery swept the 5 accounts. In the contested case hearings, the 6 Administrative Law Judge has recommended revocation in 7 each of these cases, and the staff recommends that you 8 approve the revocation of these licenses. 9 COMMISSIONER SCHENCK: A through E, Kim? 10 MS. KIPLIN: Sir? Which case? 11 CHAIRMAN WILLIAMSON: Which one -- 12 COMMISSIONER SCHENCK: A through E? 13 MS. KIPLIN: I'm sorry. A through D, as 14 in "dog." 15 CHAIRMAN WILLIAMSON: Okay. 16 MS. KIPLIN: The last one, D, is The Dam 17 Store. 18 COMMISSIONER SCHENCK: Dam Store. Okay. 19 This is not the Valero one yet? 20 MS. KIPLIN: No, it's not. 21 COMMISSIONER SCHENCK: Okay. 22 MS. KIPLIN: That's an agreed order, 23 proposed agreed order. 24 COMMISSIONER SCHENCK: Okay. 25 CHAIRMAN WILLIAMSON: Any questions, 70 1 discussions? 2 Would you like to make a motion? 3 COMMISSIONER SCHENCK: Yes. I would like 4 to make a motion that we adopt staff recommendation with 5 respect to Items A through D. 6 COMMISSIONER KRAUSE: Second. 7 CHAIRMAN WILLIAMSON: All in favor? 8 Aye. 9 COMMISSIONER SCHENCK: Aye. 10 COMMISSIONER KRAUSE: Aye. 11 CHAIRMAN WILLIAMSON: Motion passes 3 to 12 zero. 13 MS. KIPLIN: Commissioners, I have orders. 14 Item E is a worker on the Registry of 15 Approved Bingo Workers. It's recommendation from the 16 Administrative Law Judge following a contested case 17 proceeding, is removal for a disqualifying criminal 18 conviction. The staff recommends that you approve the 19 Administrative Law Judge's order. 20 CHAIRMAN WILLIAMSON: Any questions, 21 Commissioners? 22 Is there a motion? 23 COMMISSIONER SCHENCK: I move we adopt 24 staff recommendation with respect to Item E. 25 CHAIRMAN WILLIAMSON: Is there a second? 71 1 COMMISSIONER KRAUSE: Second. 2 CHAIRMAN WILLIAMSON: All in favor? 3 COMMISSIONER SCHENCK: Aye. 4 CHAIRMAN WILLIAMSON: Aye. 5 COMMISSIONER KRAUSE: Aye. 6 CHAIRMAN WILLIAMSON: Motion passes 3 to 7 zero. 8 Next item. 9 MS. KIPLIN: And I handed you the order. 10 Commissioners, Commissioner Schenck in 11 particular, the next item is letter F, which is Valero 12 Corner Store. And that is a proposed agreed order. The 13 particulars of this case were that there was a player 14 who submitted four winning instant scratch-offs for 15 payment at a Valero Corner Store up in Dallas. Two of 16 the tickets were $5.00 winners, one was a $10, and one 17 was a $500. The clerk at the time took the four 18 tickets, paid her $20 for the two fives and the $10, 19 told her she could not cash for the $500 because of the 20 amount and handed her back one of the $5.00 winning 21 tickets rather than the $500. 22 After leaving the store, the player 23 realized and the clerk realized what had occurred. 24 Ultimately what occurred is, the clerk, we believe, went 25 to another location and cashed it for $500. 72 1 Complaint was filed. It was investigated. 2 Valero paid the $500 winning amount to the player, once 3 it was discovered, and they fired the clerk. In light 4 of those facts, the staff has recommended a 10-day 5 suspension of Valero's license. 6 CHAIRMAN WILLIAMSON: Any discussion, 7 questions? 8 COMMISSIONER SCHENCK: Well, my 9 understanding, there is no evidence of any kind in the 10 record here of wrongdoing on anyone at Valero's part, 11 except this employee who they've since fired? 12 MS. KIPLIN: I think that's correct. 13 COMMISSIONER SCHENCK: And I just want to 14 say, I'm impressed that Valero did the right thing by 15 this player and paid the $500 prize. I don't think 16 we've always seen that with respect to the retailers 17 where there has been, in the rare cases, an episode like 18 this, which is obviously very concerning. 19 And, Michael, you've heard me get upset 20 about these kinds of cases before. But I'm really 21 pleased with Valero and what they did in this case. So 22 I would be fine with, frankly, a shorter suspension. If 23 they've agreed to this, it's fine by me. 24 MS. KIPLIN: I think this is the -- for 25 similar type of conduct, this is the standard penalty, 73 1 and so the staff recommends that you do stay with the 2 10-day suspension. 3 MR. ANGER: For the record, my name is 4 Michael Anger, the Lottery Operations Director. 5 And, Commissioner, to your question, this 6 appears to be an isolated action of a clerk who worked 7 at the store. And Valero was very cooperative from the 8 very beginning when we were trying to investigate the 9 facts associated with this matter and, as you noted, 10 really went the extra mile with the customer. 11 The clerk stole the ticket. It was 12 validated and paid at another store to an unknown party, 13 the clerk or someone else. But the store did step up 14 and made full payment of what would have been the prize 15 on that ticket to the player, and we did factor that 16 into our considerations in recommending this suspension. 17 CHAIRMAN WILLIAMSON: All right. Any 18 other questions? 19 Is there a motion? 20 COMMISSIONER SCHENCK: A thought just 21 occurred to me. As I sit here, I realize I own shares 22 in Valero. And that's not a problem, is it? 23 MS. KIPLIN: I will be happy to look at 24 that potential appearance of the conflict of interest. 25 And we can have an off-line conversation about the 74 1 percentage of your ownership share in a publicly traded 2 corporation. 3 (Laughter) 4 COMMISSIONER SCHENCK: I can assure it's 5 infinitesimal. It dawned on me as we were -- 6 MR. ANGER: If you own more than 10 7 percent, Commissioner, I would have records on file with 8 regards to your -- 9 MS. KIPLIN: But I would say this, you 10 know: It's obviously something that's coming to you. 11 And in an abundance of caution, if you would prefer, you 12 can certainly recuse yourself from this matter. 13 COMMISSIONER SCHENCK: I've been talking 14 about it. Maybe I shouldn't even have done that. But 15 maybe I'll just recuse myself, because I don't think 16 this is terribly controversial. 17 MS. KIPLIN: But I would say, just for the 18 record, it seems, just from your comment, that it just 19 came to your mind about this ownership interest in 20 Valero. 21 COMMISSIONER SCHENCK: That is correct, 22 just this second. 23 MS. KIPLIN: Okay. 24 COMMISSIONER KRAUSE: Well, I make a 25 motion to accept staff's recommendation on them. 75 1 CHAIRMAN WILLIAMSON: Second. 2 All in favor? 3 Aye. 4 COMMISSIONER KRAUSE: Aye. 5 CHAIRMAN WILLIAMSON: It passes. 6 Two-zero, one abstention. 7 MS. KIPLIN: Commissioners, I have an 8 order on that. And we'll note, obviously, that 9 Commissioner Schenck did not take action. And I'll just 10 say on the record, it's an issue I haven't had a chance 11 to research. And so I think Commissioner Schenck is 12 recusing himself in an abundance of caution, though it 13 may not necessarily have been legally required. 14 COMMISSIONER SCHENCK: I suspect that's 15 right. And, frankly, I doubt that Valero probably owns 16 individual stores. But in any event . . . 17 CHAIRMAN WILLIAMSON: All right. Let's 18 see. We have one more. 19 MS. KIPLIN: We have one remaining item, 20 and that is letter G, Murphy USA. It's another 21 retailer. In this case, the clerk took a credit card 22 and used a credit card to allow for the purchase of 23 lottery tickets. That's specifically prohibited by the 24 State Lottery Act. There's only four acceptable methods 25 of payment. Credit card is not one. 76 1 A complaint was filed. It was 2 investigated. And it's a 10-day suspension. A warning 3 was issued to the clerk not to accept credit cards. 4 Staff recommends that you vote to approve the proposed 5 agreed order, which is a 10-day extension. 6 CHAIRMAN WILLIAMSON: Any discussion, 7 Commissioner? 8 Is there a motion? 9 COMMISSIONER SCHENCK: I move that we 10 adopt staff recommendation. 11 CHAIRMAN WILLIAMSON: Is there a second? 12 COMMISSIONER KRAUSE: Second. 13 CHAIRMAN WILLIAMSON: All in favor? 14 COMMISSIONER SCHENCK: Aye. 15 CHAIRMAN WILLIAMSON: Aye. 16 COMMISSIONER KRAUSE: Aye. 17 CHAIRMAN WILLIAMSON: Passes 3-0. 18 MS. KIPLIN: And I have an order. 19 AGENDA ITEM NO. XX 20 CHAIRMAN WILLIAMSON: Okay. And we will 21 go on to the public comment period. I have one 22 affirmation form. Normally I would probably not approve 23 this, but we did post the time on-line for this meeting 24 to start at 10:00 rather than 9:00. So, Mr. Bresnen, if 25 you'll please come forward. 77 1 MS. KIPLIN: And as Mr. Bresnen approaches 2 the podium, I will remind the Commission that 3 Mr. Bresnen is here in a public commit. And so the 4 limitations on your deliberation as a governing body are 5 severely limited, really can't engage in a dialogue with 6 Mr. Bresnen, as much as you might want to. 7 MR. BRESNEN: Thank you, Madam Chair. And 8 I appreciate your forbearance. I swear to you I'll 9 click on the link next time and look at the actual 10 underlying document. And I won't take but just a moment 11 of your time, but I did want to tell you about something 12 that's being planned, particularly by members of the 13 Bingo Interest Group, which I'm a member, Steve 14 Bresnen -- sorry -- for the record. 15 As you-all know, there's a lot of 16 consideration in the state in the last few sessions 17 about expanding gaming to include a form of electronic 18 gaming, either by way of casinos or video lottery 19 terminals that trace racetracks or native American 20 tribes. 21 The agency a few years back, in a request 22 to a member of the Legislature, indicated that there 23 would be a devastating effect on charitable bingo if 24 that expansion were to take place without the 25 organizations being given some sort of technology to be 78 1 able to compete in that new environment. 2 So we went down to the Legislature at one 3 time and passed in the Senate an amendment with 26 votes 4 that would have allowed us to use -- play instant bingo 5 electronically, never really got anywhere in the House 6 on that. But we kind of laid out our marker on that at 7 that time. The last session, I spoke with various 8 people, various legislators interested in this issue, 9 gave them a proposal about how bingo might be saved in 10 the event that there was an expansion to include slot 11 machines or VLTs in the marketplace. And again, as you 12 know, the legislation didn't go anywhere that time. 13 This morning I woke up and I see in the 14 newspaper, in the Fort Worth Star Telegram, a 15 representative -- in this case, it's an op ed piece, but 16 there have been numerous articles. The headline bet on 17 full court press for casinos in Texas. And given the 18 state's budget picture, it looks to us like the 19 proponents of electronic gaming, through whatever 20 mechanism, have the best opportunity to pass that at 21 this time in the Legislature. And the state may need 22 the money, quite frankly. 23 So we got to thinking about how the small 24 folk in the charity bingo world might respond. We have 25 said that we are not against the expansion of gaming if 79 1 the Legislature needs the money for the education system 2 or mental health in this state or Medicaid, whatever the 3 need may be, but we need to have something in order to 4 be able to compete in that environment. 5 On the other hand, we're greatly 6 constrained under the current law in our ability to make 7 our case to the Legislature and to the voters of Texas. 8 Since last session and recently -- I believe it was 9 earlier this year -- there was a case called Citizens 10 United that was decided by the United States Supreme 11 Court that basically said the government cannot restrain 12 the speech, the exercise of First Amendment rights by 13 corporations, at least in terms of direct advertising. 14 They can still restrain, of course, political 15 contributions and that sort of thing. 16 After reading that case and looking at two 17 provisions in the Bingo Enabling Act that provide that a 18 charitable organization cannot use their bingo proceeds 19 to lobby the Legislature for a change in the law or to 20 try to effect a ballot measure, which would be necessary 21 to amend the Texas constitution, I concluded that those 22 two statutes are unconstitutional. 23 You may recall that we filed an advisory 24 opinion request with y'all -- I did -- to ask you to 25 rule on that question under your authority under the 80 1 statute to issue advisory opinions. I concluded that by 2 the time y'all asked for an AG opinion on that, if you 3 did, that I would be up into the legislative session by 4 the time they ruled and Texas charities would be 5 handcuffed and unable to go forward confidently and 6 participate fully in the legislative process. 7 Consequently, it's been concluded by the 8 people that I represent, who have about 100-plus 9 charities in their halls, that it's our intention to 10 file a lawsuit against the State of Texas in federal 11 court, hopefully between the first of June and 12 June 15th, and ask the federal court to strike down 13 those two provisions in the Texas statutes so the 14 organizations can fully participate. 15 We found it ironic that veterans of 16 foreign wars who fought for these rights were 17 constrained by statute from using their proceeds from 18 bingo to go and express their interest and exercise 19 those rights before the Legislature. Consequently, we 20 intend to try to do something about it. 21 I've given you a five-point plan. I won't 22 read it to you. But sufficient to say that we fully 23 intend, all members of the industry fully intend to 24 participate in the legislative process. If there is 25 going to be an expansion of gaming along the lines that 81 1 have been discussed in the past, then we want to be 2 considered in that. 3 I know the agency has frequently in the 4 past been called upon to supply information to the 5 Legislature about the various issues that are raised 6 about this. And we will be bringing to you in the 7 coming weeks information that documents the impact on 8 the charitable bingo in other states that have gone to 9 racinos or casino gambling. And we would be happy to 10 work with the staff on that and make sure y'all are 11 fully informed. 12 But I wanted to make sure that y'all knew 13 about it. I know that Ms. Trevino has a copy of the 14 action plan, I believe she's provided to Phil, may have 15 provided it to y'all. But I wanted to make sure that we 16 called that to your attention and explained the reasons 17 why we're proceeding as we are. 18 These charities provide a significant 19 service to the State of Texas. They provide services to 20 communities that the Legislature either can't or won't 21 fund, and we can't stand idly by and have them run over 22 by a bunch of wealthy track owners or casino owners or 23 the folks that would like to service casinos at native 24 American reservations. So we're not hostile to it as 25 long as we're allowed to participate. 82 1 When the lottery came in, followed by 2 gaming in Oklahoma, Louisiana, New Mexico, there is a 3 measurable impact that caused the graph to go just down 4 like this (indicating). About a quarter of the 5 charities, as I recall, got driven out of business. 6 With the opening of the WinStar track in 7 Oklahoma, Dallas-Fort Worth area bingo has been in a 8 real ditch. And then smoking ordinances and other 9 things have had a real impact on bingo in the state. 10 So all of those things taken into 11 consideration and the prospect of an expansion to 12 electronic gaming in the state have caused us to take 13 these actions, which may seem extreme on the surface but 14 are necessary to protect these people and their 15 interests. 16 I don't know if you can ask any questions 17 or I can answer them under this thing, but I just wanted 18 to let y'all know. To the extent there's any 19 developments along this line, I'll make sure you are 20 aware of it in the future. 21 And again, Madam Chair, thank you very 22 much for your courtesy. 23 CHAIRMAN WILLIAMSON: Thank you. 24 MR. BRESNEN: Thank you. 25 83 1 AGENDA ITEM NO. XXI 2 CHAIRMAN WILLIAMSON: At this time I move 3 the Texas Lottery Commission go into executive session 4 to deliberate the duties and evaluation of the Executive 5 Director, Internal Audit Director and Charitable Bingo 6 Operations Director and to receive any legal advice 7 regarding pending or contemplated litigation. 8 Is there a second? 9 COMMISSIONER SCHENCK: I second the 10 motion. 11 CHAIRMAN WILLIAMSON: All in favor? 12 COMMISSIONER SCHENCK: Aye. 13 COMMISSIONER KRAUSE: Aye. 14 CHAIRMAN WILLIAMSON: Aye. 15 Vote is 3-0. We will go into executive 16 session at 10:55 a.m. Today is May the 21st. 17 (Off the record for executive session: 18 10:55 a.m. to 11:17 a.m.) 19 AGENDA ITEM NO. XXII 20 CHAIRMAN WILLIAMSON: The Texas Lottery 21 Commission is out of executive session. The time is 22 11:17 a.m. And there is no action to be taken as a 23 result of the executive session. 24 25 84 1 AGENDA ITEM NO. XXIII 2 So at this point, I believe we need a 3 motion to adjourn. 4 COMMISSIONER SCHENCK: I move that we 5 adjourn. 6 CHAIRMAN WILLIAMSON: Is there a second? 7 COMMISSIONER KRAUSE: Second. 8 CHAIRMAN WILLIAMSON: All in favor? 9 COMMISSIONER SCHENCK: Aye. 10 CHAIRMAN WILLIAMSON: Aye. 11 COMMISSIONER KRAUSE: Aye. 12 CHAIRMAN WILLIAMSON: Meeting is 13 adjourned. The vote was three to zero. 14 (Meeting adjourned: 11:17 a.m.) 15 16 17 18 19 20 21 22 23 24 25 85 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified Shorthand 5 Reporter in and for the State of Texas, do hereby 6 certify that the above-mentioned matter occurred as 7 hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings of 9 such were reported by me or under my supervision, later 10 reduced to typewritten form under my supervision and 11 control and that the foregoing pages are a full, true 12 and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set my 14 hand and seal this 1st day of June 2010. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/10 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25